Community investing is the process of directing capital from investors to communities underserved by traditional financial services. It provides access to credit, equity, capital, and basic banking products that these communities would otherwise not have. In the U.S. and around the world, community investing makes it possible for organizations to provide financial services to low-income individuals, and to supply capital for small businesses and vital community services, such as child care, affordable housing, and health care.

What problems does community investing address?

Community investing seeks to financially empower impoverished communities. Often, people assume that poverty is caused simply by a lack of income, but low-income alone does not explain the insidious nature of poverty in many American communities. The problem is not simply a lack of income, but rather who owns and controls the basic resources that are crucial to any community’s well being: who owns and controls the land, housing, businesses, and necessary capital to purchase land, housing, or businesses. In almost all poor communities—whether they are Appalachian mining towns, withering farm communities in the Midwest, rural towns in Eastern Maine, or urban areas reeling from the loss of industry—a very high percentage of real estate and businesses are owned by people who do not live in these communities.

Major Wall Street institutions like Bank of America, JPMorgan Chase, and Citigroup finance activities that are in direct contradiction to many schools’ values. Witness the foreclosure crisis and banks’ predatory lending practices, for example. Would your school be in favor of predatory mortgage lending, robosigning, and forcing people out of their homes? Unfortunately, they may have been helping to finance these practices.

Wall Street institutions often have terrible environmental records, while smaller banks often get high marks. The big banks finance major corporations’ environmentally destructive practices, such as logging and deforestation and mountaintop removal coal mining (which the investment community has repeatedly confronted them about). Community financial institutions on the other hand have financed projects such as retrofits, renewable energy resources, and local food infrastructure.

Supporting local business and giving local communities ownership over resources. When businesses are owned by people who do not live in the community (or by corporations that “live” in no community), the business profits do not accrue to local people and are not reinvested in the community. Plus, outside owners have little incentive to value the wellbeing or health of the natural environment of the community and will quickly relocate their businesses as soon as it appears that they can make higher profits elsewhere. Community investing empowers community members to own and control the basic resources that are crucial to the community’s wellbeing, thereby breaking the cycle.

How do the investments work? What’s a “CDFI”?

Individuals and institutions invest their money into Community Development Financial Institutions(CDFIs), like community banks and credit unions. All CDFIs use the investments they receive toward fulfilling their mission statements, which include an explicit commitment to community economic development. This is an important distinction to make between CDFIs and mainstream financial institutions. Whereas the Bank of America down the block may be lending to some local businesses, it is also distributing its investors’ capital (a.k.a. money) across the globe to multinational corporations, governments, and other financial institutions. Investors in CDFIs, meanwhile, are guaranteed that their capital will primarily circulate within the CDFIs designated community, making community investment much more transparent than conventional investment.

Where is the money we want to move?

We focus on the two simplest ways in which schools can start investing based on the two biggest pots of money: the operating account, which is like a school’s checking account, and the endowment, which is like a school’s savings account.

First, schools can invest a portion of their endowment into community financial institutions. Many schools keep about 5% of their endowments invested in cash, which are typically stable investments with a low rate of return and high liquidity—essentially, the money is available and easy to access. Some examples of low-risk, low-return investments include cash assets, government bonds, and certificates of deposit (CDs) from banks. (These are just different types of investments to keep money accessible and slowly, safely growing.) Since CDFIs frequently earn comparable rates of return to these cash asset investments, schools can transfer the percent of their endowments dedicated to cash assets to CDFIs.

Second, schools can use a CDFI or other community-focused bank for some of their operating funds. Most schools keep a large portion of their operating funds in cash assets to keep the money easily accessible. Some of these investments can be transferred to CDFIs, since CDFIs provide many of the same services as mainstream financial institutions.

How much money should we move?

We suggest that you ask for as much as you can — it may not be possible to have your school completely break up with its bank this year, but better to ask for a significant amount and get some then ask for some and only get a little. Schools like Harvard, Louisville, Peralta, and the University of Cincinatti have moved tens or even hundreds of millions of dollars. We recommend that you simply ask for all or a large portion of the cash assets to move — you can roughly estimate the cash assets in your endowment as 5% of your endowment in many cases, for example, and you may be able to find the yearly operating budget in a school’s annual report (try googling it).

Which schools already do community investing?

Check out our success stories page to see successes from around the country. One of the strongest arguments you can make in favor of community investment is to show your administration that its peer institutions have already taken the lead.

Why is our cash in the bank it’s in? Are there connections to interests within the administration?

See “How To Find Out Where Your School’s Bank Is” in our Community Investment Toolkit [PDF], but don’t worry if you can’t find out too much by digging. If there is a specific bank or ATM branch on campus or a presence during major events (freshmen orientation, etc.) where they have offers on credit cards or other services, then your university may have a business deal with that bank. Even if they have a ten-year contract, as some schools do, this shouldn’t preclude your administration from being able to at least make a smaller community investment “down-payment” as the first step.

Should we choose a new financial institution that is close to campus or one that is located in a particularly underserved community?

This is up to you. We suggest you offer your administration a few different options so they can see that there’s a variety of opportunities. Remember — it’s their job at the end of the day to do the detailed research — in drawing up a list of options, your goal is to show them that there are safe, viable alternatives to the status quo, not to spend hours of your time doing thankless research.

Who has the power to make this happen? How do we approach that person/people?

We recommend targeting the one individual who usually has their “finger on the button” or at least is highly influential in making the decision – this is usually the Chief Financial Officer or Chief Investment Officer. Ultimately, it is the Board of Trustees that often has final say, especially in the case of the endowment, but REC has seen cases where the investment office has made the decision to switch banks for the operating account autonomously.

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